Structured Sale

A structured sale is a special type of installment sale pursuant to the Internal Revenue Code. Installment sales permit sellers to defer recognition of gains on the sale of a business or real estate to the tax year in which the related sale proceeds are received. Structured sales allow the seller of an asset to pay taxes over time while having the payments guaranteed by a high credit quality alternate obligor, who accepts assignment of the buyers periodic payment obligation. Transactions can currently be done as small as $100,000.

In a structured sale, rather than the buyer paying the installments, the buyer pays cash, some of which is used as consideration for a third party assignment company to accept the payment obligation. The assignment company then purchases an annuity from a life insurance company with high financial ratings from A. M. Best. Case law and administrative precedents support recognition of the original contract terms after a substitution of obligors. In addition, a properly handled transaction will avoid issues with constructive receipt and economic benefit.

While negotiating the installment payments, the seller is free to design payment streams with a great deal of flexibility. Each installment payment to the seller has three components: deferred return of basis, deferred capital gain, and ordinary income earned on the money in the annuity. Under the doctrine of constructive receipt, with a properly documented structured sale, no taxable event is recognized unless a payment is actually received. Taxation is the same as if the buyer were making installment payments directly.

Structured sales are an alternative to a section 1031 exchange, which defers recognition of capital gain, but forces the seller to continue holding some form of property. Structured sales work well for sellers who want to create a continuing stream of income without management worries. Retiring business owners and downsizing homeowners are examples of sellers who can benefit.

The structured sale must be documented, and money must be handled in such a way that the ultimate recipient is not treated as having constructive received the payment prior to the time it is actually paid. For the buyer, there is no difference from a traditional cash-and-title-now deal, except for additional paperwork. Because of tax advantages to the seller, structuring the sale might, however, make the buyer's offer more attractive. Because the buyer has paid in full, the buyer gets full title at time of closing.

There are no direct fees to the buyer or seller to employ the structured sale strategy. The structured settlement specialist who implements the transaction is paid directly by the life insurance company that writes the annuity.

The internal rate of return is comparable to long term high quality debt instruments.

Although Allstate Life was the originator of the structured sale concept, it departed the structured settlement business in 2013. New entrants to the market include TFSS, Treasury Funded Structured Settlements.

Internal Revenue Service Private Letter Ruling 150850-07 dated June 2, 2008 confirmed that the taxpayer does not constructively receive payment for tax purposes until the actual cash payment is made pursuant to a properly drafted non-qualified assignment.

Other articles related to "sale":

Private Annuity Trust
... directly selling them and incurring substantial taxes from their sale ... A PAT can defer 100% of the United States federal capital gains tax due on the sale of an asset, provide a stream of income, and effectively remove the asset from the owner's estate, thus reducing or eliminating ... capital gains taxes, such as the charitable remainder trust (CRT), installment sale, or tax-deferred 1031 exchange ...

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